The following is a brief unscheduled update—not only on developments in the marijuana investing sector but also on my thinking about the investment prospects in the industry going forward. I hope you find it useful.
When I first published Cabot Marijuana Investor last August, it was in response to growing demand for exactly that information from Cabot subscribers. And I’ve always believed that if subscribers want something, then I should try to provide it.
But I had only a fuzzy notion back then of how the service might evolve—or for that matter, how the industry might evolve.
Still, I saw that the trends were strong, and investing in trends is my strength, so I jumped in. And it’s been a good ride since August. (As I write, the average profit in the portfolio is 126%.)
Plus, I’ve learned a lot.
In fact, just two weeks ago, I attended the Cannabis World Conference and Business Expo in New York City and heard a lot of smart speakers, including Bruce Linton (the CEO of Canopy Growth), Governor Bill Weld (who with John Boehner is now a director-lobbyist of Acreage Holdings, the largest marijuana investment entity in the U.S.) and Whoopi Goldberg (who’s put her name on a line of medical marijuana products designed to ease menstrual cramps and discomfort).
My main takeaway from that conference was that the trend continues to gain strength, at a faster rate than expected.
Which reminds me of one of my key precepts about investing in trends.
“Trends tend to last longer and go farther than observers expect.”
Bottom line, the global cannabis industry is going to be bigger than almost everyone expects today.
Today, the industry is growing at a 27% annual rate, which is faster than all major industries of the past 50 years except one— broadband access.
Ultimately, 90% of cannabis use will be for “adult use,” bought just as we buy beer and wine—and bought not to get high, but simply to ease pain or anxiety or provide comfort.
Which brings me to the “Education Section” of this letter.
Cannabis is a genus of plants – like citrus. Lemons and grapefruits are both citrus, but they’re clearly different.
Marijuana is the species of cannabis that has tetrahydrocannabinol (THC), which gets you high. Hemp is another species of cannabis, which has very little THC, but does have lots of cannabidiol (CBD), a cannabinoid that it also present in marijuana. CBD has a lot of interesting non-psychoactive properties (purportedly relief from PMS, PTSD, anxiety, arthritis and nausea, to name a few) but they’re not well understood—and the reason is simple.
Hemp used to be a great industrial product in this country before WWII, but its family ties to marijuana tainted its image. Federal law made it illegal to grow hemp in 1970.
As a result, today, you can get a doctor’s prescription for marijuana in 29 states, but you can’t get a prescription for CBD—and that’s basically because it’s been illegal to even study the effects of CBD. Now, you can buy CBD in 17 states where it’s been legalized, but in those states you buy it as a wellness product (like valerian or ubiquinol or turmeric), not as a medical product.
Eventually, however, I expect the market for CBD to exceed the market for marijuana, and that’s simply because pain/discomfort is universal. Additionally, I believe people will welcome a product that’s far less dangerous than opioids.
The timeline, of course, is unknown, but one of the experts I heard predicted that cannabis will be legal under U.S. federal law by 2021. And there was a general consensus at the conference that prices will come down as supplies increase.
Last but not least, there was a consensus that big money has just begun to enter the industry. Last year we saw Constellation Brands take a 10% stake in Canopy Growth, and before long, you should see Big Tobacco, Big Pharma and even Big Hospitality enter the industry.
Happily, you are one of the early investors.
Cannabis Retail Coming to Canada
Looking at recent developments, Canada voted yes last week to allow the sale and use of adult marijuana across the country. Next, the House of Commons is expected to approve the measure, and then retailers will be given time to stock stores with product. Bottom line: there should be retail sales of marijuana all across Canada in September.
From an investment point of view, that may actually be a good time to sell; stocks tend to peak on good news.
But I continue to advise that this is a sector best suited to long-term investing, so what I mainly recommend is not to buy on any public good news. Instead, try to buy on corrections.
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Now to the stocks, in order of market capitalization.
Canopy Growth (CGC) looks great, trading a bit below its January closing high of 34. Clearly, it’s benefitted from being the biggest. A pullback of a few points from here would mark a decent buy point. At the conference, CEO Bruce Linton spoke about his plans for global growth, noting that because cannabis is easy to grow (there’s a reason it’s called weed), he expects local governments to impose tariffs to imported product to encourage local production instead. So his plan is to establish local production wherever possible, ideally before the competition.
Aurora Cannabis (ACBFF) sold off significantly more than CGC in February and March, but it has remained above its 200-day moving average, and just last week popped above its 25-and 50-day moving averages, which is encouraging. Aurora announced this week that it would acquire Anandia Laboratories, a leading cannabis breeding and testing laboratory led by Dr. Jonathan Page, the first scientist to sequence the cannabis genome. Following the acquisition, Anandia will continue to serve outside clients.
Aphria (APHQF) sold off even worse than Aurora, falling below its 200-day moving average for several weeks in April and May, but it’s rallied back and actually seems like a low-risk buy right here. Last week the company announced that it would build a $55 million extraction center in Ontario to get “a significant competitive advantage in cannabis concentrates, which are expected to be a significant product category,” and which will have the capacity to process more than 200,000 kgs of cannabis annually.
Note: Those first three stocks, “The Big Three,” were the big winners in the market advance that peaked in January, so they were due for a prolonged cooling-off period. Eventually, they will get going again and move out to new highs—but no one knows when. Meanwhile, the remaining stocks in the portfolio, in general, have better short-term prospects. Additionally, some investors are thinking that if an oversupply of product develops, companies higher up the value chain (processors and distributors and retailers) will fare better.
Cronos Group (CRON) is one of the second-tier Canadian growers. Its stock bounced strongly in early March when it became the first cannabis stock listed on the Nasdaq exchange and has been tracing out a nice consolidation pattern since. It could be bought here, but would be more attractive closer to 6.
Hydropothecary (HYYDF) is another Canadian grower. The stock closed at a record high in late May, but it wasn’t a true breakout above the January high and now the stock has pulled back normally. It can be bought here. In May the company introduced HEXO, its new brand for the recreational adult use market in Canada. Hydropothecary will remain its medical marijuana brand.
Turning Point Brands (TPB) is the old smokeless tobacco company and its stock has been burning up the track; it’s been up for six consecutive weeks now and is up 43% since the start of May. There is no obvious reason for this, but clearly growing numbers of investors are concluding that the company’s experienced management and its “shelf space” in the retail environment will prove to be great advantages as it shifts from the nicotine industry to the cannabis industry. Note: of these 10 companies, TPB is one of only two that have positive earnings. If you don’t own TPB yet, take it slow, either by buying small amounts or waiting for a pullback.
Organigram (OGRMF) is another Canadian grower. Its stock broke out to new highs in early June when the company’s phase 3 expansion received its official cultivation license and it’s now on a normal pullback. Wait until this pullback bottoms before you begin buying.
The smallest three companies on my list are based in the U.S., and they’re small simply because the U.S. lags Canada in the trend toward legalization; there are no big growers in the U.S. But these three do have great growth prospects, and they add welcome diversification.
Kush Bottles (KSHB) was a hot stock before the January top, so like the big growers, it’s still cooling off. Meanwhile, management has made some big moves. First, as I reported last month, was the company’s acquisition of a leading distributor of hydrocarbon gasses, an attempt to lock in a key component of the cannabis industry infrastructure. Then came the announcement of a new division, Koleto Packaging Solutions, which will bring FDA-compliant packaging solutions to the pharmaceutical and veterinary industries. And then last week the company raised $36 million by selling stock and warrants, thus diluting the stock of existing shareholders. The stock dropped immediately after, but remains in a healthy pattern and can be bought here.
iAnthus Capital Holdings (ITHUF) iAnthus owns and operates growers, processors and dispensaries in six U.S. states, and just this week announced an agreement to open its second dispensary in Massachusetts. The stock has closed at record highs for the past three days and can be bought if you know how to handle strong stocks.
Innovative Industrial Properties (IIPR) is the real estate investment trust (REIT) dedicated to the cannabis industry—and the second company in the portfolio with actual earnings. Its latest acquisition was a property in Massachusetts that will be leased to PharmaCann, which has three production facilities and nine dispensaries in multiple states. The stock climbed out to new highs at the end of May and has quietly continued to advance since. It’s a healthy pattern—and the stock yields 3%.
